As banks and financial institutions navigate the rapidly evolving world of cryptocurrency, digital assets continue to attract significant investment. At the forefront of this trend is Bitcoin (BTC), a foundational option that has reshaped the financial landscape and influenced both traditional banks and cryptocurrency markets.
The emergence of Bitcoin ETFs has marked a significant development, introducing a new asset class that bridges the gap between these worlds by making Bitcoin more accessible to conventional investors. For exchanges and investors, understanding the differences between Bitcoin and Bitcoin ETFs is crucial. While both provide exposure to Bitcoin’s market value, they come with distinct structures, trading mechanisms, and regulatory requirements.
Recognizing these differences not only enables more informed listing decisions but also helps navigate the complexities of trading and compliance within the dynamic crypto market.
Bitcoin is often referred to as “the mother of all cryptocurrencies,” and for good reason. Launched in 2009 by pseudonymous creator Satoshi Nakamoto, it was the world’s first mineable cryptocurrency, introducing a new form of digital asset that could be earned through a process called mining. This process involves solving complex mathematical problems to validate transactions on the blockchain, rewarding participants with newly minted Bitcoin.
Since its inception, Bitcoin’s popularity has soared, with its value surging from a fraction of a cent in its early days to over $73,000 in March 2024. As a decentralized asset, Bitcoin offers an alternative to traditional currencies, free from the control of central banks and governments.
Unlike fiat money, which can be printed in unlimited quantities, Bitcoin’s supply is capped at 21 million coins, creating scarcity that many view as a hedge against inflation. Although the last coins are not expected to be mined until 2140, the fixed supply helps limit inflationary risks compared to traditional currencies, making BTC appealing as a store of value. However, its higher volatility relative to fiat currencies and gold means investors should carefully consider the risks before investing.
To understand Bitcoin ETF, it helps to start with what an ETF (exchange-traded fund) is. An ETF is a basket of securities that tracks the performance of an asset class, such as currencies and commodities. A Bitcoin ETF tracks Bitcoin’s value but trades on a stock exchange instead of a crypto exchange.
Although Bitcoin ETFs are relatively new — the U.S. Securities and Exchange Commission (SEC) approved the first spot Bitcoin ETFs in January 2024 — they have quickly gained popularity, especially among traditional investors. They offer exposure to BTC without the complexities of trading, managing, or storing the actual digital asset.
There are two types of Bitcoin ETFs:
Some notable ETFs include:
| ETF | Investment | Value of assets under management |
| iShares Bitcoin Trust ETF (IBIT) | Spot BTC | $21.1 billion |
| Bitwise Bitcoin ETF | Spot BTC | $2.2 billion |
| Grayscale Bitcoin Trust (GBTC) | Spot BTC | $13.3 billion |
| ProShares Bitcoin Strategy ETF (BITO) | Bitcoin Futures | $1.8 billion |
| VanEck Bitcoin Trust (HODL) | Spot BTC | $760.300M |
| Ark 21Shares Bitcoin ETF (ARKB) | Spot BTC | $2.85 billion |
| Volatility Shares 2x Bitcoin ETF (BITX) | Bitcoin Futures | $1.44 billion |
While Bitcoin and Bitcoin ETFs share some similarities, their key characteristics set them apart. Here’s an in-depth look at the major distinctions:
When you buy Bitcoin, you own the actual asset, with full control over its private keys and storage.
In contrast, owning Bitcoin ETFs means holding shares that represent exposure to Bitcoin’s price movements without directly managing the underlying asset.
Bitcoin trades on cryptocurrency exchanges, where transactions are not restricted by time — trades occur 24/7.
Bitcoin ETFs, however, are traded on traditional stock exchanges and are subject to standard market hours. For major exchanges like Nasdaq and the New York Stock Exchange (NYSE), this is typically Monday to Friday from 9:30 a.m. to 4 p.m., except on public holidays.
Bitcoin’s liquidity is influenced by factors such as the crypto exchanges‘ trading volume, transaction fees (investors may be hesitant to trade if exchange fees are high), and price volatility.
For Bitcoin ETFs, liquidity depends on stock market dynamics, including interest rates — higher rates can reduce the liquidity of speculative assets like Bitcoin ETFs.
The type of fund also plays a role: spot-based ETFs have liquidity closely linked to the Bitcoin market, while futures-based ETFs depend on the liquidity of Bitcoin futures contracts.
With direct ownership of Bitcoin, investors must manage and secure their assets. This often involves using hot wallets (online) for day-to-day trading and cold wallets (offline) for added security, as cold wallets are less susceptible to hacking.
In contrast, Bitcoin ETF investors don’t need to handle asset management or security; the fund provider typically does this, making ETFs appealing to those less familiar with the crypto space.
Bitcoin is largely unregulated, with most countries lacking clear legal frameworks. Unfortunately, this regulatory uncertainty increases the risk of market manipulation and adds to BTC’s volatility.
Bitcoin ETFs are subject to more stringent regulation and oversight by financial regulators like the SEC and, therefore, offer a bit more protection for investors.
Bitcoin’s tax obligations are more complex than Bitcoin ETFs. While ETF investors typically pay capital gains tax on profits, Bitcoin investors face additional taxable events. The Internal Revenue Service (IRS) requires them to not only pay tax when they sell BTC, but also when:
Fee structures also differ. Bitcoin traders pay crypto exchange fees (e.g., deposit, withdrawal, trading, and spread fees), while Bitcoin ETF investors incur administrative costs, fund management fees, and trading expenses.
Bitcoin and Bitcoin ETFs each offer unique advantages and disadvantages that can impact investment decisions.
Some of the pros of investing directly in Bitcoin include:
Some of the cons of owning Bitcoin directly include:
The pros of Bitcoin ETFs include:
Its cons include:
Listing Bitcoin and Bitcoin ETFs can be profitable, given their popularity. However, it’s essential to understand the infrastructure required, the regulatory environment, and the risks associated with each asset before proceeding. Let’s take a deeper look at these considerations:
Efficient BTC trading requires robust digital infrastructure. Key features to consider in crypto exchange software include:
AlphaPoint provides a comprehensive infrastructure to meet these needs, allowing you to launch a secure and efficient crypto exchange. Our solution eliminates the need for extensive crypto banking software development, with most essential features built in.
Bitcoin ETFs are subject to significant regulatory oversight. To list an ETF, exchanges must obtain approval from regulatory bodies.
This process involves:
While Bitcoin remains largely unregulated, exchanges must comply with certain rules, including AML (Anti-Money Laundering) and KYC (Know Your Customer) requirements, to prevent traders from using their platforms for illegal activities. In the EU, exchanges must comply with the Markets in Crypto-Assets Regulation (MiCA), a framework governing the crypto market.
Bitcoin ETF providers are typically required to comply with SEC regulations, such as:
Both Bitcoin and Bitcoin ETFs present liquidity and volatility challenges that can affect market efficiency and investor returns.
For Bitcoin trading, liquidity issues can arise from order book imbalances, where buy and sell orders do not match, leading to price slippage. Further, the decentralized nature of the crypto market can make it susceptible to manipulation, such as wash and whale trading, which can heighten volatility.
To mitigate these risks, consider the following strategies:
Bitcoin ETFs also face risks, including liquidity issues and tracking errors, where the ETF’s price diverges from Bitcoin’s spot price. To manage these risks effectively:
Bitcoin and Bitcoin ETFs attract different types of investors. Bitcoin appeals to those seeking direct asset ownership, often with experience in the crypto space. In contrast, Bitcoin ETFs cater to traditional investors who want exposure to BTC without engaging directly in the crypto space.
If you’re considering listing these digital assets, AlphaPoint offers the ideal solution. Our scalable white-label software allows you to quickly enter the market with infrastructure that’s not only configurable but also built for security, compliance, and high-performance trading. AlphaPoint’s platform equips you with the tools you need to manage liquidity, minimize risks, and optimize trading efficiency.
Schedule a demo with AlphaPoint today to discover how our platform can help you launch these investment vehicles.
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